Come Together (for Fiduciary Best Practices)

Rostad offered some evidence that specifically details just what investors find lacking in their relationships with advisors. “Some recent research and commentary puts the blame directly at the feet of advisors who communicate incompletely or unclearly. Such poor communications means clients do not know the fees and expenses they pay for advisor services or how advisors are compensated.”

For example:

• Rostad referred to a panel at Ron Carson’s Peak Advisor Alliance conference where consultant Michael Maslansky brought investors on stage to react to a series of pre-recorded pitches from advisors. The consensus of the investors was captured by one observer this way: “The way advisors talked about how they were paid—belaboring the concepts of ‘fees’ and ‘fiduciary mandates’—made it seem as though they had something to hide. What the clients wanted was a number. How much do I pay you?”

• Jack Waymire, CEO of the Paladin Registry, a company that screens RIAs and IARs, surveyed his member registered advisors and found “‘advisors want to selectively disclose the information they provide to investors.’ Eighty-six percent said they did not practice voluntary transparency or documentation; only 14% of advisors voluntarily discussed their method of compensation when marketing their services,” Rostad wrote.

• 3Ethos CEO Don Trone wrote in a Financial Advisor magazine column about deception. Rostad said, “Citing practices including ‘pay to play,’ ‘obtuse disclosures’ and ‘faux fiduciaries,’ Trone notes these involve efforts ‘to get the public to believe something that’s not true’ and are at the core of the state of distrust. ‘People who deceive or attempt to deceive are the key reasons the public puts so little trust in our industry,’ Trone said.”

Unfortunately, as Rostad forcefully illustrated, investor-confidence-restoring reregulation isn’t likely to come from the SEC under its Dodd-Frank mandate. The paper listed six assumptions made in the commission’s “request for information” (RFI) about broker and advisor reregulation under Section 913 that indicate an inclination to erode rather than strengthen fiduciary standards:

The RFI picture of fiduciary duties is far more restricted and far less stringent than the fiduciary duties required by the Investment Advisers Act of 1940. An analysis by the Institute concludes the RFI:

1. Sharply restricts what is defined as fiduciary advice and adds new ambiguity about the difference between fiduciary advice and sales communications. […]

2. Allows fiduciary duties to be waived […] through contract provisions, marketing materials or disclosure that does not require informed consent. […]

3. Suggests disclosure best addresses conflicts. [And fails to note] that, irrespective of the disclosure, the recommendation must remain in the best interest of the client. […]

4. Omits mention of ‘informed consent,’ [allowing] more casual disclosure and oral disclosure. […]

5. Rebrands ‘conflicts.’ There is no mention of any harm associated with conflicts [and] omits any mention of associated benefits of avoiding conflicts. […]

6. Redefines ‘loyalty.’ Loyalty today means ‘do the right thing.’ [The RFI] essentially urges that the duty of loyalty be redefined to mean ‘disclose doing the wrong thing.’

“Taken together,” Rostad concluded, “these assumptions represent a profound departure from the Advisers Act. If adopted in rulemaking, fiduciary duties would be effectively removed for brokers and advisors giving investment advice to retail investors.”

The remedy to both the current erosion of public trust of advisors and the SEC’s likely failure to enact confidence enhancing regulations, Rostad suggested, is for advisors to create standards of practice that would clearly differentiate fiduciary advisors from those who practice under the SEC’s inevitably watered-down standards. “Fiduciary conduct nurtures investor trust, the central pillar on which capital markets and the economy depend,” according to Rostad.

Consequently, he wrote: “Fiduciary advisors need to act. They need to craft and uphold and articulate the vital importance of fiduciary best practices that investors want and sorely need.”

Advisors need to give extra “attention to duties in areas where individual investors face significant risk and appear to be greatly concerned, i.e., conflicts of interest, fees and expenses, and unclear or inaccurate communications,” Rostad wrote.

He stated that the Institute Best Practices Board “seeks to shift the direction of the discussion of fiduciary duties and definition of acceptable best practices to reflect the principles and values so well expressed by highly respected jurists and regulators in recent history when they, also, spoke of ‘the highest standard under the law.’”

I can’t help but wonder if some of the organizations that Rostad hopes to unite on the Best Practices Board aren’t already too caught up in their own popularity contest to even consider such a collective action. Even in their absence, I hope the board does succeed in raising the bar for how fiduciary advisors deliver client services. However, I suspect that ultimately one organization will step up to create the high best practices standards that Rostad advocates—and to articulate the need for them so effectively that the rest of the advisory world will be forced to follow in its wake.